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entitled 'Medicare: Covert Testing Exposes Weaknesses in the Durable
Medical Equipment Supplier Screening Process' which was released on
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Report to the Permanent Subcommittee on Investigations, Committee on
Homeland Security and Governmental Affairs, U.S. Senate:
United States Government Accountability Office:
GAO:
July 2008:
Medicare:
Covert Testing Exposes Weaknesses in the Durable Medical Equipment
Supplier Screening Process:
DME Supplier Convert Testing:
GAO-08-955:
GAO Highlights:
Highlights of GAO-08-955, a report to the Permanent Subcommittee on
Investigations, Committee on Homeland Security and Governmental
Affairs, U.S. Senate.
Why GAO Did This Study:
According to the Department of Health and Human Services (HHS), schemes
to defraud the Medicare program have grown more elaborate in recent
years. In particular, HHS has acknowledged Centers for Medicare &
Medicaid Service’s (CMS) oversight of suppliers of durable medical
equipment, prosthetics, orthotics, and supplies (DMEPOS) is inadequate
to prevent fraud and abuse. Specifically, weaknesses in the DMEPOS
enrollment and inspection process have allowed sham companies to
fraudulently bill Medicare for unnecessary or nonexistent supplies.
From April 2006 through March 2007, CMS estimated that Medicare
improperly paid $1 billion for DMEPOS supplies—in part due to fraud by
suppliers.
Due to the committee’s concern about vulnerabilities in the enrollment
process, GAO used publicly available guidance to attempt to create
DMEPOS suppliers, obtain Medicare billing numbers, and complete
electronic test billing. GAO also reported on closed cases provided by
the HHS Inspector General (IG) to illustrate the techniques used by
criminals to fraudulently bill Medicare.
On June 18, 2008, we briefed CMS representatives on the results of our
investigation. In response, they acknowledged that our covert tests
illustrate gaps in oversight that still require improvement and stated
that they would continue to work to strengthen the entire DMEPOS
enrollment process.
What GAO Found:
Investigators easily set up two fictitious DMEPOS companies using
undercover names and bank accounts. GAO’s fictitious companies were
approved for Medicare billing privileges despite having no clients and
no inventory. CMS initially denied GAO’s applications in part because
of this lack of inventory, but undercover GAO investigators fabricated
contracts with nonexistent wholesale suppliers to convince CMS and its
contractor, the National Supplier Clearinghouse (NSC), that the
companies had access to DMEPOS items. The contact number GAO gave for
these phony contracts rang on an unmanned undercover telephone in the
GAO building. When NSC left a message looking for further information
related to the contracts, a GAO investigator left a vague message in
return pretending to be the wholesale supplier. As a result of such
simple methods of deception, both fictitious DMEPOS companies obtained
Medicare billing numbers. The following figure contains a redacted
acceptance letter GAO received from CMS.
Figure: CMS Approval Letter for GAO's Fictitious DMEPOS Company:
This figure is a picture of a CMS approval letter for GAO's fictitious
DMEPOS company.
[See PDF for image]
Source: CMS.
[End of figure]
After requesting an electronic billing enrollment package and obtaining
passwords from CMS, GAO investigators were then able to successfully
complete Medicare’s test billing process for the Virginia office. GAO
could not complete test billing for the Maryland office because CMS has
not sent the necessary passwords. However, if real fraudsters had been
in charge of the fictitious companies, they would have been clear to
bill Medicare from the Virginia office for potentially millions of
dollars worth of nonexistent supplies.
Once criminals have similarly created fictitious DMEPOS companies, they
typically steal or illegally buy Medicare beneficiary numbers and
physician identification numbers and use them to repeatedly submit
claims. In one case from HHS IG, a company received $2.2 million in
payments from Medicare for supplies and services that were never
delivered. The owner submitted these fraudulent claims from March 2006
through July 2006 using real beneficiary numbers and physician
identification numbers that he had purchased illegally. The only
employee not involved in the scheme was a secretary, who told HHS IG
that there was no business activity in the office and that the owner
was rarely there. Another case related to an individual who stole
beneficiary numbers and physician identification numbers and submitted
$5.5 million in claims for three fraudulent offices from October 2006
through March 2007. He operated one of these offices out of a utility
closet containing buckets of sand mix, road tar, and a large wrench,
but no medical files, office equipment, or telephone.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-955]. For more
information, contact Gregory D. Kutz at (202) 512-6722 or kutzg@gao.gov
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Testing the Medicare Enrollment Process:
Case Studies Provide Real Examples of Fraudulent DMEPOS Suppliers:
Corrective Action Briefing:
Conclusion:
Appendix I: 25 Standards for Medicare Suppliers of Durable Medical
Equipment, Prosthetics, Orthotics, and Supplies:
Appendix II: GAO Contact and Staff Acknowledgments:
Figures:
Figure 1: Timeline of Maryland DMEPOS Supplier Application and Approval
Process:
Figure 2: Maryland DMEPOS Supplier Approval Letter:
Figure 3: Timeline of Virginia DMEPOS Supplier Application and Approval
Process:
United States Government Accountability Office:
Washington, DC 20548:
July 3, 2008:
The Honorable Carl Levin:
Chairman:
The Honorable Norm Coleman:
Ranking Member:
Permanent Subcommittee on Investigations Committee on Homeland Security
and Governmental Affairs United States Senate:
Medicare, which is administered by the Department of Health and Human
Services' (HHS) Centers for Medicare & Medicaid Services (CMS), helps
pay for a variety of health care services and items on behalf of almost
42 million elderly and certain disabled beneficiaries. According to
HHS, schemes to defraud the Medicare program have grown more elaborate
in recent years, resulting in the misuse of taxpayer dollars and the
misdirection of funds intended to help beneficiaries. In particular,
HHS has acknowledged that there are significant vulnerabilities in
CMS's oversight of suppliers of durable medical equipment, prosthetics,
orthotics, and supplies (DMEPOS). Specifically, weaknesses in the
DMEPOS enrollment and inspection process have allowed sham companies to
fraudulently bill Medicare for unnecessary or nonexistent supplies. For
example, in December 2006, the HHS Inspector General (IG) randomly
visited 1,581 DMEPOS suppliers in South Florida and found that almost
one-third of them did not even have an office at the business address
they provided Medicare, although they had collectively submitted claims
for hundreds of millions of dollars worth of supplies. In part due to
fraud by suppliers, CMS estimated that, from April 2006 through March
2007, $1 billion of the $10 billion in payments Medicare made for
DMEPOS supplies were improper.
To prevent fraudulent DMEPOS suppliers from entering the Medicare
program, CMS developed 25 standards that suppliers must meet to be
authorized to bill Medicare for health care services and items that
they provide to beneficiaries.[Footnote 1] These standards are intended
to help ensure that suppliers are legitimate businesses and properly
licensed within the states they operate. CMS contracts with the
National Supplier Clearinghouse (NSC) to screen potential suppliers and
enroll into the Medicare program only those that comply with all 25
standards. NSC and its contractors are required to verify suppliers'
compliance through on-site inspections and conduct other reviews, such
as confirming that the supplier either has access to its own DMEPOS
inventory or has a contract with a wholesaler. Once a DMEPOS supplier
successfully completes this verification process, CMS sends the
supplier an approval letter containing a Medicare billing number. To be
able to submit claims to Medicare electronically, DMEPOS suppliers that
opt to do their own billing also have to complete Medicare's test
billing process using their billing number, Medicare beneficiary
numbers, and ordering physician identification numbers.[Footnote 2]
In 2005, we reported that NSC's efforts to verify compliance with the
standards were insufficient because of weaknesses in procedures for
checking state licensure and conducting on-site inspections.[Footnote
3] As a result, CMS agreed to take a number of actions to strengthen
NSC's verification procedures, including requiring NSC to conduct site
inspections of DMEPOS suppliers' off-site inventory storage locations
and of the wholesaler businesses that provide them with inventory
through contracts.[Footnote 4] Despite these reported actions, you
continue to be concerned that vulnerabilities in the DMEPOS enrollment
process allow fraudulent suppliers to enroll in and ultimately bill
Medicare. Therefore, we agreed to test CMS's processes by attempting to
create fictitious DMEPOS suppliers, obtain Medicare billing numbers,
and successfully complete electronic test billing. We also agreed to
develop case studies to illustrate the techniques used by criminals in
recent years to fraudulently bill Medicare for DMEPOS supplies.
To complete our testing, we used publicly available guidance and
software to open two DMEPOS suppliers. Because CMS has divided the
country into four regions--or zones--we set up one company in Maryland
(Zone A) and one in Virginia (Zone C) so that we could determine
whether the contractors conducting the Medicare application review,
including visits to the companies, followed consistent review steps in
each zone. To appear legitimate, we also created a series of phony
documents and company policies. We then submitted applications to CMS
to obtain a Medicare billing number. To complete the test billing
process, we used undercover, fictitious Medicare beneficiaries, as well
as physician identification numbers that we found on the Internet. It
is important to note that we only used this information to complete
test billing; we did not compromise the provider status of any
legitimate physicians or the status of actual beneficiaries by
submitting actual claims using their identification information. To
demonstrate how criminals use similar techniques, we worked with the
HHS IG to identify recently closed DMEPOS supplier fraud cases. We
performed our undercover operation from February 2007 through June 2008
in accordance with guidelines established by the President's Council
for Integrity and Efficiency.
Results in Brief:
CMS approved both of our fictitious, easily created DMEPOS storefronts
despite the fact that we had no clients and no inventory. Even though
CMS and NSC initially denied our applications in part due to this lack
of inventory, they eventually accepted the phony contracts with
wholesale suppliers we created. NSC performed limited verification to
confirm the authenticity of these contracts. For example, the telephone
number we gave for the wholesalers rang on an unmanned undercover
telephone in the GAO building. When NSC's inspector left a message on
the number looking for further information related to the contracts, a
GAO investigator left a vague message in return pretending to be the
wholesaler. As a result of such simple methods of deception, we
obtained Medicare billing privileges and billing numbers for both
companies, even though we had absolutely no means of supplying
prospective clients with durable medical equipment. After requesting an
electronic billing enrollment package and obtaining passwords from CMS,
we were then able to successfully complete Medicare's test billing
process for our Virginia office; we did not complete test billing for
our Maryland office because we did not receive the necessary passwords
from CMS by the close of our investigation in June 2008. Based on a
review of case studies we obtained from HHS IG, we believe that, had
our operation continued successfully, we could have fraudulently billed
Medicare for substantial sums--potentially reaching millions of
dollars.
Once criminals similarly create fictitious DMEPOS companies, they
typically steal or illegally buy Medicare beneficiary numbers and
physician identification numbers and use them to repeatedly submit
claims. In one closed case we obtained from HHS IG, a fraudulent
company billed Medicare for $4.4 million in supplies and services that
were never delivered, ultimately receiving $2.2 million in payments.
The owner submitted these claims from March 2006 through July 2006
using legitimate beneficiary numbers and physician identification
numbers that he had purchased illegally. According to HHS, the only
employee not involved in the scheme was a secretary, who told
investigators that there was no business activity in the office and
that the owner was rarely there. Another case relates to an individual
who submitted $5.5 million in fraudulent claims from October 2006
through March 2007. This individual purchased a DMEPOS company but then
submitted claims using the original owner's identity, Medicare billing
number, and beneficiaries in an attempt to avoid detection by CMS. At
the same time, this individual was operating two additional fraudulent
DMEPOS companies--one of them located in a utility closet containing
buckets of sand mix, road tar, and a large wrench (but no medical
files, telephone, or other office equipment).
Background:
Medicare's 25 supplier standards were introduced to deter individuals
intent on committing fraud from entering the program and to safeguard
Medicare beneficiaries by ensuring that suppliers were qualified. The
25 standards apply to a variety of business practices and establish
certain requirements and prohibitions (see app. I for a list of the
standards). For example, the standards require suppliers to have a
physical facility on an appropriate site that is accessible to
beneficiaries and to CMS, with stated business hours clearly posted.
The following are the most pertinent standards for the purposes of this
report:
* Standard 1: Operate business and furnish Medicare-covered items in
compliance with all applicable federal and state licensure and
regulatory requirements.
* Standard 4: Fill orders for equipment or supplies using its own
inventory or by contracting with other companies. If the supplier
contracts with other companies, it must provide copies of the contracts
upon request.
* Standard 7: Maintain a physical facility that contains space for
storing business records including the supplier's delivery,
maintenance, and beneficiary communication records.
* Standard 8: Permit CMS to conduct on-site inspections. In addition,
the supplier's location must be accessible during reasonable business
hours to beneficiaries and to CMS, and must maintain a visible sign and
posted hours of operation.
* Standard 9: Maintain a primary business telephone listed under the
name of the business locally or toll-free for beneficiaries.
* Standard 10: Have a comprehensive liability insurance policy in the
amount of at least $300,000 that covers both the supplier's place of
business and all customers and employees of the supplier. Failure to
maintain required insurance at all times will result in revocation of
the supplier's billing privileges retroactive to the date the insurance
lapsed.
* Standard 14: Must maintain and replace at no charge or repair
directly, or through a service contract with another company, Medicare-
covered items it has rented to beneficiaries. The item must function as
required and intended after being repaired or replaced.
NSC verifies compliance with the 25 standards, primarily during
enrollment and reenrollment, through on-site inspections conducted by
subcontractors, and desk reviews conducted by NSC analysts. NSC
requires that site inspectors arrive unannounced for any inspection.
Before the inspection, NSC provides the inspectors with briefing
information on the supplier, including information on whether the
supplier is enrolling or reenrolling and the type of state licenses to
verify. While on site, inspectors are expected to take photographs of
the supplier's sign with its business name, posted hours of operation,
complete inventory in stock, and facility. NSC also expects site
inspectors to obtain copies of relevant documents, such as state
licenses, comprehensive liability insurance policies, contracts with
companies for inventory, and contracts for the service and maintenance
of DMEPOS supplies. NSC analysts are expected to check that the
supplier has all the state licenses that it would need to provide the
items it disclosed in its application. The NSC analyst is also expected
to contact the insurance underwriter to ensure that the supplier's
policy is valid and the post office to make sure the supplier's address
is listed. NSC also has a procedure to match data from its supplier
database with computerized lists maintained by the federal government
to ensure that supply company owners are not prohibited from
participating in federal health care programs or debarred from federal
contracting.
In addition, suppliers submitting an enrollment application to NSC on
or after March 1, 2008, must also be accredited by an approved
organization prior to submitting the application. These accrediting
organizations are supposed to ensure that prospective DMEPOS suppliers
meet quality standards related to financial and human resource
management, consumer management, product safety, product delivery, and
beneficiary training, among others.[Footnote 5] DMEPOS suppliers that
enrolled for the first time between January 1, 2008, and February 29,
2008, must obtain accreditation by January 1, 2009. Suppliers that
enrolled with Medicare before January 1. 2008, must obtain
accreditation by September 30, 2009. Further, CMS is beginning to
implement competitive bidding, which will change how suppliers obtain
the right to participate in the program. Competitive bidding is a
process in which suppliers of medical equipment and supplies compete
for the right to provide their products on the basis of established
criteria, such as quality and price. Competitive bidding provides CMS
with the authority to select suppliers by screening their financial
documents such as income statements and credit reports and other
application materials. CMS has chosen suppliers to serve beneficiaries
in 10 Metropolitan Statistical Areas and the program is scheduled to
begin July 1, 2008.
Apart from the competitive bidding program, as long as suppliers can
demonstrate that they comply with all the standards and have not been
excluded from participating in any federal health care program, NSC
must enroll or reenroll them in Medicare. Enrolled suppliers are issued
a Medicare billing number. If NSC discovers that a new applicant or
enrolled supplier is not in compliance with any of the 25 standards,
NSC can deny the application or, with CMS's approval, revoke the
supplier's billing number.[Footnote 6] Suppliers whose applications
have been denied or whose numbers have been revoked can submit a plan
to NSC to correct the noncompliance, appeal the denial or revocation by
requesting a hearing or both.
In January 2008, CMS proposed creating five new standards and
strengthening several of the existing standards.[Footnote 7] The new
standards require most suppliers to be open to the public for at least
30 hours per week and prohibit them from sharing an office with another
supplier. They will also be required to maintain ordering and referring
documentation received from physicians for 7 years. Finally, suppliers
that have a federal or state tax delinquency will be prohibited from
obtaining or retaining billing privileges. With regard to strengthening
the existing standards, CMS will, among other things, require that
suppliers maintain an office to store business records and will limit
the use of cell phones, beeper numbers, pagers, and answering services
as the primary DMEPOS business telephone number during posted hours of
operation.
Testing the Medicare Enrollment Process:
After establishing two fictitious DMEPOS storefronts with no inventory
and no clients, our undercover investigators were able to successfully
complete the Medicare enrollment process. Although CMS and NSC
initially requested corrections to our paperwork and then denied our
applications because we failed to comply with 2 of the 25 standards,
they never detected the fact that our companies were fictitious. After
submitting corrective action plans addressing the standards we failed,
both companies were approved for Medicare billing privileges and
provided with billing numbers. These numbers, in conjunction with
billing passwords and software, allowed us to successfully complete
Medicare's test billing process for our Virginia office. Based on a
review of case studies we obtained from HHS IG, we believe that, had
our operation continued successfully, we could have fraudulently billed
Medicare for substantial sums--potentially reaching millions of
dollars.
Creating Fictitious DMEPOS Companies:
Prior to submitting applications to CMS to become approved DMEPOS
suppliers, investigators easily set up two fictitious durable medical
equipment companies during April and May 2007 using undercover names
and bank accounts. Although we did not actually obtain any inventory,
we decided that both companies would be generic medical supply
companies, providing, among other things, commodes, diabetic supplies,
surgical dressings, urinals and bedpans, walkers and canes, and manual
wheelchairs. To appear legitimate, we rented 100 square foot commercial
offices in both Maryland and Virginia. Both rentals cost approximately
$1,000 per month and came complete with Internet, phone and fax
service, and a shared secretary. We also set up fictitious Web sites,
created brochures and business cards, and purchased a few "props" to be
prepared for on-site inspections, including a wheelchair and bed pan.
Our investigators for the most part followed the general procedures
that any legitimate business would use to begin DMEPOS operations.
First, they paid online registration companies about $400 per supplier
to obtain required state business licenses, such as sales tax licenses.
In addition, for each company, investigators obtained employer
identification numbers (EIN) from the Internal Revenue Service (IRS)
and National Provider Identification (NPI) numbers from CMS.[Footnote
8] Investigators obtained both numbers for free online using basic
information, such as the business name and address.
To make sure that our companies would meet the requirements for DMEPOS
suppliers as outlined in the 25 standards, we did the following.
* We created phony contracts with two fictitious DMEPOS wholesale
suppliers to demonstrate that we had the capacity to supply equipment
and supplies to clients. We also established phone numbers for each
fictitious wholesale supplier. In reality, these phone numbers were
unmanned extensions in the GAO building.
* We created signs for the office doors listing hours of operations and
staffed the offices with undercover agents posing as sales
representatives.
* We purchased approximately $3 million worth of general liability
insurance covering, among other things, property damage and employee
injury, at a cost of $550 annually.
Obtaining a Medicare Billing Number:
The approval process for both applications[Footnote 9] was similar and
the site inspections were even conducted by the same individual, who
identified several discrepancies related to our office paperwork. Even
though we corrected these discrepancies and submitted all required
documentation, both of our applications were initially denied due to
lack of compliance with two of the standards. In particular, even
though we had already submitted our contracts with phony wholesale
suppliers, CMS said that we did not demonstrate that we had the
capacity to fill orders for equipment or supplies using our own
inventory or by contracting with other companies, as per Standard 4.
According to CMS, we also did not demonstrate that we could replace or
repair the items we provided to beneficiaries, as per Standard 14. To
comply with these two standards, we sent NSC corrective action plans
that included repair policies and the same phony DMEPOS wholesale
supplier contracts that we had previously submitted. CMS accepted this
documentation as valid and approved both of our fictitious DMEPOS
companies. In short, the subcontractors hired to review our
applications ultimately focused on the technical and administrative
completeness of our applications rather than attempting to determine
whether we were running valid businesses.
Maryland Application Review and Site Visits: The application review
process for our fictitious Maryland DMEPOS company took approximately 9
months, from the end of May 2007 until February 2008, when we received
an approval letter from CMS containing a Medicare billing number. As
shown in figure 1 and described in the following narrative, although
NSC and its subcontractors identified several administrative
discrepancies, they never uncovered the fact that our DMEPOS company
was a fraudulent business.
Figure 1: Timeline of Maryland DMEPOS Supplier Application and Approval
Process:
This figure is a timeline of Maryland DMEPOS supplier application and
approval process.
5/22: DMEPOS provider application sent to CMS/NSC;
6/26: Facility site inspection by NSC contractor. Some documentation
was not provided by undercover investigators during site visit and
follow-up was required;
8/17: Last communication with NSC to provide information for the
application;
10/8: Application rejected as of October 2, 2007;
10/30: Mailed “Corrective Action” plan to NSC for reconsideration of
application;
11/1: Closed physical office and began using “virtual” office;
11/28: Undercover investigators left a message with NSC contractor
claiming to be wholesale suppliers;
2/4: NSC requested a confirmation of banking information;
2/5: Sent NSC banking information;
2/18: Received CMS letter stating that Maryland DMEPOS was approved for
a Medicare billing number effective February 13, 2008;
[See PDF for image]
Source: GAO.
[End of figure]
As shown in the figure, we sent our application for review on May 22,
2007. On June 26, 2007, a representative from a contractor hired by NSC
to conduct inspections visited the office. The representative explained
to our undercover investigator, who was posing as a salesperson, that
the visit would be used to gather information needed to verify
compliance with CMS's standards. Using a checklist, the representative
asked questions about the company's return policy, how the items were
going to be delivered, and whether we had a warehouse or if we would
have items drop-shipped from a supplier. He also asked if any member of
our fictitious owner's family was in the medical supply business, if
the owner had any business partners, and if there were any investors.
The representative also asked for copies of our state licenses,
insurance policy, and other documentation. Our investigator was
deliberately vague in his responses to the representative and did not
provide the inspector with any of the requested documentation, telling
the representative that the "owner" had all that information.
The representative also took pictures of the office to make sure that
the building was accessible to persons with disabilities. He asked for
our insurance documentation and noted that it was missing the company's
physical address. Finally, he mentioned that the business needed a sign
in the office window identifying its location and hours. We did not
have the hours posted because the building where our office was located
had a policy prohibiting postings on office windows; however, the
investigator told the representative that he would speak to the
building managers and ensure that the hours were posted. The
representative then presented our investigator with a site visit
acknowledgement form and checked off the following eight documents that
needed to be provided to NSC as required by the standards:
* required licenses, including zoning,
* complaint log,
* complaint resolution protocol,
* rental/purchase option agreement,
* comprehensive liability insurance,
* credit agreements or invoices,
* proof of warranty coverage, and:
* written instructions on beneficiary use.
One day later, we sent NSC the information requested on the checklist.
On July 17, 2007, NSC requested a full copy of the over 100 page
insurance policy; we had sent an abbreviated version provided by our
carrier after the site visit, but NSC wanted a complete copy. We
immediately contacted the carrier and they agreed to send a complete
copy directly to NSC. On August 15, 2007, NSC requested that we provide
it with warranty information for DMEPOS rentals and we faxed the
information on August 17. We had no further communication with NSC or
the subcontractor who conducted the site visit until we called on
October 3, 2007, requesting information about the status of our
application.
On October 8, we received a letter from CMS denying our application for
a billing number because our company did not adhere to 2 of the 25
standards. Specifically, even though we had already submitted our
contracts with phony wholesale suppliers, CMS said that we did not
demonstrate that we had the capacity to fill orders for equipment or
supplies using our own inventory or by contracting with other
companies, as per Standard 4. According to the letter, we also did not
demonstrate that we could replace or repair the items we provided to
beneficiaries, as per Standard 14. The letter also informed us that we
could reopen our application by submitting a "corrective action plan"
addressing our deficiencies within 90 days. As part of the corrective
action plan, we sent NSC a repair policy and resubmitted our phony
supplier contract on October 30, 2007. We also provided the contact
numbers that we created for the wholesale suppliers and informed NSC
that we had hired a full-time employee to take care of repair issues.
On November 1, 2007, we closed down our physical office and switched to
a "virtual office" in the same building, meaning that we no longer had
designated office space but still had access to mail and fax services,
the shared secretary, and meeting rooms.
Although we were never questioned about our plan to correct our repair
policy, NSC did call the undercover phone number we set up for our
phony DMEPOS wholesale supplier in November and left a message
requesting additional information. Posing as a representative for this
wholesale supplier, an undercover investigator left a vague message in
response but did not confirm the existence of a contract or a credit
line. NSC never returned these calls or conducted any other followup.
Over the next several months, we repeatedly called NSC and its
subcontractors to determine the status of our application and
corrective action plan. Each time, we were told that our application
was still under review. Finally, on February 4, 2008, NSC requested a
voided check or deposit slip to confirm our banking information so that
we could be set up for electronic funds transfers. We provided the
information the next day, and CMS approved our application and sent us
a Medicare billing number in its approval letter dated February 13,
2008 (see fig. 2).
Figure 2: Maryland DMEPOS Supplier Approval Letter:
This figure is a picture of Maryland DMEPOS supplier approval letter.
[See PDF for image]
Source: CMS.
[End of figure]
Virginia Application Review and Site Visit: The application review
process for our fictitious Virginia DMEPOS company took approximately 6
months, from the end of July 2007 until January 2008, when we received
an approval letter retroactive to September 28, 2007, and a Medicare
billing number. As shown in figure 3 and the following narrative, NSC's
inspectors identified several discrepancies in our application and at
our office but never uncovered the fact that our DMEPOS company was a
fraudulent business.
Figure 3: Timeline of Virginia DMEPOS Supplier Application and Approval
Process:
This figure is a timeline of Virginia DMEPOS supplier application and
approval process.
7/24: DMEPOS provider application sent to CMS/NSC;
8/15: NSC stated that our application was incomplete;
8/30: Final communication with NSC regarding incomplete information on
our applications;
9/18: Facility site inspection by NSC contractor. Some documentation
was not provided by undercover investigators during site visit and
follow-up was required;
9/20: Faxed information to NSC as follow-up to site visit;
10/4: Application rejected as of September 28, 2007;
11/1: Closed physical office and began using “virtual” office;
12/11: Mailed “Corrective Action” plan to NSC for reconsideration of
application;
1/30: Received CMS letter stating the Virginia DMEPOS had been approved
for a Medicare billing number effective September 28, 2007
[See PDF for image]
Source: GAO.
[End of figure]
As shown in figure 3, we sent our application for review on July 24,
2007. Although we complied with most of the application instructions,
we did make several errors on the application. Specifically, we failed
to provide copies of certain state licenses and certifications and did
not check either "yes" or "no" when asked if we had any previous legal
actions filed against the company or its owners. NSC detected these
errors and on August 15, 2007, we received a letter stating that our
application was incomplete. In addition, NSC requested clarification
about our office location and requested a voided check or deposit slip
to confirm our bank account so that we could be set up for electronic
funds transfers. We corrected all these discrepancies by August 30,
2007.
NSC's representative, the same individual who inspected our Maryland
office, inspected the site on September 18, 2007. As with the Maryland
office, this individual used a simple checklist to conduct the
inspection and asked for the same documentation, including licenses,
insurance policy, complaint protocols, rental agreement, and
instructions for beneficiary use of the supplies. This time, the
undercover investigator immediately provided almost all the information
requested. The representative provided a site acknowledgment form with
just one missing item checked off: written instructions on beneficiary
use/maintenance of supplies. We sent these instructions to NSC on
September 20, 2007.
On October 4, 2007, we received a letter from CMS denying our
application for a billing number because our company did not adhere to
2 of the 25 standards--the same standards we had failed to comply with
in Maryland. Specifically, we did not demonstrate that we had the
capacity to fill orders for equipment or supplies using our own
inventory or by contracting with other companies, as per Standard 4.
According to the letter, we also did not demonstrate that we could
replace or repair the items we provided to beneficiaries, as per
Standard 14. As in Maryland, we sent NSC our repair policy and
resubmitted our phony wholesale supplier contract on December 11, 2007,
as part of our corrective action plan to show compliance with the
standards.[Footnote 10] Because our corrective action plans for the
Maryland and Virginia offices were identical, we intentionally delayed
sending our Virginia plan by several months so as not to arouse
suspicion with NSC. We also provided the contact numbers that we
created for the wholesale suppliers and informed NSC that we hired a
full-time employee to take care of repair issues.
To our knowledge, NSC did not do any further investigation and accepted
the existence of the fictitious DMEPOS wholesale suppliers we created.
On January 30, 2008, we received an approval letter and Medicare
billing number. The letter stated that the effective date of the
approval was retroactive to September 28, 2007--the date our
application was initially denied.
Completing Electronic Test Billing:
After requesting an electronic billing enrollment package and obtaining
passwords from CMS, we were able to successfully complete Medicare's
often confusing test billing process for our Virginia office; we did
not complete test billing for our Maryland office because we did not
receive the necessary passwords from CMS by the close of our
investigation in June 2008. Had we been real fraudsters, we could have
fraudulently billed Medicare for substantial sums, potentially reaching
millions of dollars.
Although the Medicare approval letters we received contained billing
numbers, they contained no instructions for how to begin the electronic
billing process. Consequently, we had to do our own research on CMS and
NSC Web sites in order to figure out that we needed to download billing
enrollment packets so that we could be approved to submit electronic
claims. We sent completed enrollment packets for both companies to
CMS's contractor by the beginning of March 2008. These packets included
billing applications, completed Electronic Data Interchange (EDI)
agreements and software order forms, contact information, NPIs, and
EINs for our two companies. We did not receive any further information
related to the Maryland DMEPOS company. On March 13, 2008, we received,
among other things, an electronic billing submitter identification
number and password for the Virginia office. There were no instructions
accompanying this information and it was not clear to which systems
each applied.
Using billing software downloaded from the Web, we began processing
claims by entering fictitious dates of service, our undercover
beneficiary information, DMEPOS item codes and charges, generic
diagnosis codes, our billing numbers, and physician identification
numbers that we found on the Internet.[Footnote 11] It is important to
note that we only used the latter to complete test billing; we did not
compromise the provider status of any legitimate physicians by
submitting fraudulent claims using their identification information. We
then submitted several completed claims to CMS for acceptance, but our
first few attempts were rejected. Our undercover investigator called
CMS's help desk for assistance and found that we had to input our
billing number on one of CMS's billing-related Web sites.[Footnote 12]
There had been no instructions in the billing packet indicating that
this was a required step. Once we provided our billing number at the
site, CMS approved our initial claims. As required by the electronic
enrollment application, DMEPOS suppliers must submit a single test file
with at least 25 claims that are 95 percent error-free in order to
complete test billing. On May 14, 2008, we successfully submitted a
file with 27 claims for $6,876.34 with no errors.
Case Studies Provide Real Examples of Fraudulent DMEPOS Suppliers:
As shown by four closed cases from South Florida that we obtained from
the HHS IG, criminals use similar techniques to establish fictitious
DMEPOS suppliers and then employ billing schemes to obtain millions of
dollars in Medicare funds from the government. Specifically, once
criminals have created fraudulent DMEPOS companies, they typically
steal or buy Medicare beneficiary numbers and physician identification
numbers in order to repeatedly submit claims.
Case Study 1: The owner of this fraudulent company admitted to HHS that
she started her DMEPOS company after working as a secretary for another
fraudulent company. She rented an office in the same location as this
company and worked with her former employer to obtain all the required
state licenses. She also purchased fake invoices for DMEPOS equipment
from another company to make it seem as though she was obtaining
legitimate supplies from a wholesaler. In February 2005, she received
her Medicare provider number and then provided her former employer with
kickbacks in order to have access to Medicare beneficiary numbers. From
January 1, 2006, through April 30, 2007, she submitted about $1.5
million in claims to Medicare for supplies including urinary bags,
tubing, canisters, and air mattresses. Ultimately, Medicare paid the
company $372,286. The owner was indicted for health care fraud on
September 11, 2007, and was convicted and sentenced on January 22,
2008, to 30 months imprisonment and 3 years supervised release, and
ordered to pay $372,286 in restitution.
Case Study 2: This case relates to three fraudulent companies with the
same owner. In October 2006, the owner bought a DMEPOS company that had
been incorporated in August 2006 and used the original owner's
identity, billing number, and beneficiaries to submit claims in an
attempt to avoid detection by CMS. The new company used an address in
Coral Gables but did not have a real office and did not serve
customers. The owner also stole the personal identification numbers of
licensed physicians. According to the HHS IG, these physicians did not
have any involvement with the company and did not provide care or
prescriptions related to the submitted claims. During the course of its
investigation, HHS discovered that the owner had opened another
fraudulent DMEPOS company. This company used a utility closet as its
address--HHS investigators found buckets of sand mix, road tar, and a
large wrench in the room, but no medical files, office equipment, or
telephone. This time, the owner used a fictitious physician name and
identification number to submit claims to CMS; CMS confirmed that this
number should not have passed the initial computer system edit for
payment. Finally, while conducting a financial analysis of the second
company's bank account records, investigators found that the owner
operated yet another fraudulent DMEPOS company. In total, from October
2006 through March 2007, the owner submitted claims from these three
companies in excess of $5.5 million and ultimately received about
$77,000 from Medicare. In August 2007, the owner was sentenced to 37
months in prison for conspiracy to commit health care fraud, ordered to
pay over $70,000 in restitution, and made to forfeit his Miami home and
Rolls Royce.
Case Study 3: This company billed Medicare for $4.4 million dollars
worth of supplies and services that were never delivered. These claims
were submitted between March and July 2006 using real beneficiary
numbers that the DMEPOS company owner had purchased illegally.
Ultimately, Medicare paid approximately half of these claims ($2.2
million). According to HHS IG records, the only employee not involved
in the scheme was a secretary who told investigators that there was
never any business activity in the office and that the owner rarely
visited. She also stated that Medicare beneficiaries often called her
to complain that they had received an explanation of benefits letter in
the mail even though they did not receive any supplies or services. The
Bank of America eventually filed a suspicious activity report as a
result of the company's billing practices. The Federal Bureau of
Investigation (FBI) and HHS IG subsequently determined that the owner
stole the identities and physician identification numbers of practicing
physicians to legitimize his fraudulent claims. The owner plead guilty
to one count of health care fraud and on March 16, 2007, was sentenced
to 4 years in prison and 3 years of probation, assessed a $100 fee, and
ordered to pay $2.2 million in restitution.
Case Study 4: The owner of this DMEPOS company operated a fictitious
supply business out of an office connected to a real estate company and
purchased real Medicare beneficiary numbers illegally for $45 each in
order to submit claims. Through data mining, the HHS IG determined that
the company displayed billing patterns that were highly consistent with
known fraudulent practices. Specifically, the company owner used a
small number of stolen physician identification numbers to submit
numerous claims for expensive DMEPOS items that are typically used in
fraudulent schemes, including motorized wheelchairs, wound therapy
pumps, and infusion equipment. From July 2005 through October 2006, the
DMEPOS company billed the Medicare program over $1 million and received
over $500,000 in payments. On August 7, 2007, the owner was ordered to
pay $702,186 in restitution to Medicare and was sentenced to 2 years in
federal prison and 3 years of probation.
Corrective Action Briefing:
On June 18, 2008, we informed representatives from CMS about the
results of our investigation. In response, they stated that they are
implementing new supplier requirements, including the accreditation
process and the revisions and additions to the 25 standards that were
proposed in January 2008. They also acknowledged that our covert
testing illustrates gaps in oversight that still require improvement
and stated that they would continue to work to strengthen the entire
DMEPOS enrollment process.
Conclusion:
Although CMS took actions to address our prior recommendations, we
found that the fraud prevention controls in place during our
investigation were not effective in preventing our fictitious DMEPOS
companies from obtaining legitimate Medicare billing numbers and
completing test billing. As indicated, CMS is currently taking
additional actions to strengthen both the 25 standards and its
oversight of the DMEPOS supplier enrollment process; however, these
actions will only be successful if those tasked with ensuring
compliance exercise due diligence when conducting screenings and
inspections. Our covert tests clearly demonstrate that a simple
paperwork review is not sufficient. Unless CMS and its contractors
scrutinize suppliers to ensure that they are responsible, legitimate
businesses, DMEPOS fraud will continue to cost taxpayers billions of
dollars each year.
As agreed with your offices, unless you announce the contents of this
report earlier, we will not distribute it until 30 days from its date.
At that time, we will send copies to the Administrator of CMS and other
interested parties. In addition, the report will be available at no
charge on the GAO Web site at [hyperlink, http://www.gao.gov].
Please contact me at (202) 512-6722 or kutzg@gao.gov if you have any
questions concerning this report. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. Key contributors are listed in appendix II.
Signed by:
Gregory D. Kutz:
Managing Director:
Forensic Audits and Special Investigations:
[End of section
Appendix I: 25 Standards for Medicare Suppliers of Durable Medical
Equipment, Prosthetics, Orthotics, and Supplies:
Standard number: 1;
Description of what a supplier must do: Operates its business and
furnishes Medicare-covered items in compliance with all applicable
Federal and State licensure and regulatory requirements.
Standard number: 2;
Description of what a supplier must do: Has not made, or caused to be
made, any false statement or misrepresentation of a material fact on
its application for billing privileges. (The supplier must provide
complete and accurate information in response to questions on its
application for billing privileges. The supplier must report to CMS any
changes in information supplied on the application within 30 days of
the change.)
Standard number: 3;
Description of what a supplier must do: Must have the application for
billing privileges signed by an individual whose signature binds a
supplier.
Standard number: 4;
Description of what a supplier must do: Fills orders, fabricates, or
fits items from its own inventory or by contracting with other
companies for the purchase of items necessary to fill the order. If it
does, it must provide, upon request, copies of contracts or other
documentation showing compliance with this standard. A supplier may not
contract with any entity that is currently excluded from the Medicare
program, any State health care programs, or from any other Federal
Government Executive Branch procurement or nonprocurement program or
activity.
Standard number: 5;
Description of what a supplier must do: Advises beneficiaries that they
may either rent or purchase inexpensive or routinely purchased durable
medical equipment, and of the purchase option for capped rental durable
medical equipment, as defined in § 414.220(a) of this subchapter. (The
supplier must provide, upon request, documentation that it has provided
beneficiaries with this information, in the form of copies of letters,
logs, or signed notices.)
Standard number: 6;
Description of what a supplier must do: Honors all warranties expressed
and implied under applicable State law. A supplier must not charge the
beneficiary or the Medicare program for the repair or replacement of
Medicare covered items or for services covered under warranty. This
standard applies to all purchased and rented items, including capped
rental items, as described in § 414.229 of this subchapter. The
supplier must provide, upon request, documentation that it has provided
beneficiaries with information about Medicare covered items covered
under warranty, in the form of copies of letters, logs, or signed
notices.
Standard number: 7;
Description of what a supplier must do: Maintains a physical facility
on an appropriate site. The physical facility must contain space for
storing business records including the supplier's delivery,
maintenance, and beneficiary communication records. For purposes of
this standard, a post office box or commercial mailbox is not
considered a physical facility. In the case of a multi-site supplier,
records may be maintained at a centralized location.
Standard number: 8;
Description of what a supplier must do: Permits CMS, or its agents to
conduct on-site inspections to ascertain supplier compliance with the
requirements of this section. The supplier location must be accessible
during reasonable business hours to beneficiaries and to CMS, and must
maintain a visible sign and posted hours of operation.
Standard number: 9;
Description of what a supplier must do: Maintains a primary business
telephone listed under the name of the business locally or toll-free
for beneficiaries. The supplier must furnish information to
beneficiaries at the time of delivery of items on how the beneficiary
can contact the supplier by telephone. The exclusive use of a beeper
number, answering service, pager, facsimile machine, car phone, or an
answering machine may not be used as the primary business telephone for
purposes of this regulation.
Standard number: 10;
Description of what a supplier must do: Has a comprehensive liability
insurance policy in the amount of at least $300,000 that covers both
the supplier's place of business and all customers and employees of the
supplier. In the case of a supplier that manufactures its own items,
this insurance must also cover product liability and completed
operations. Failure to maintain required insurance at all times will
result in revocation of the supplier's billing privileges retroactive
to the date the insurance lapsed.
Standard number: 11;
Description of what a supplier must do: Must agree not to contact a
beneficiary by telephone when supplying a Medicare- covered item unless
one of the following applies:
(i) The individual has given written permission to the supplier to
contact them by telephone concerning the furnishing of a Medicare-
covered item that is to be rented or purchased;
(ii) The supplier has furnished a Medicare- covered item to the
individual and the supplier is contacting the individual to coordinate
the delivery of the item;
(iii) If the contact concerns the furnishing of a Medicare-covered item
other than a covered item already furnished to the individual, the
supplier has furnished at least one covered item to the individual
during the 15- month period preceding the date on which the supplier
makes such contact.
Standard number: 12;
Description of what a supplier must do: Must be responsible for the
delivery of Medicare covered items to beneficiaries and maintain proof
of delivery. (The supplier must document that it or another qualified
party has at an appropriate time, provided beneficiaries with necessary
information and instructions on how to use Medicare-covered items
safely and effectively.)
Standard number: 13;
Description of what a supplier must do: Must answer questions and
respond to complaints a beneficiary has about the Medicare-covered item
that was sold or rented. A supplier must refer beneficiaries with
Medicare questions to the appropriate carrier. A supplier must maintain
documentation of contacts with beneficiaries regarding complaints or
questions.
Standard number: 14;
Description of what a supplier must do: Must maintain and replace at no
charge or repair directly, or through a service contract with another
company, Medicare-covered items it has rented to beneficiaries. The
item must function as required and intended after being repaired or
replaced.
Standard number: 15;
Description of what a supplier must do: Must accept returns from
beneficiaries of substandard (less than full quality for the particular
item) or unsuitable items (inappropriate for the beneficiary at the
time it was fitted and rented or sold) from beneficiaries.
Standard number: 16;
Description of what a supplier must do: Must disclose these supplier
standards to each beneficiary to whom it supplies a Medicare-covered
item.
Standard number: 17;
Description of what a supplier must do: Must comply with the disclosure
provisions in § 420.206 of this subchapter.
Standard number: 18;
Description of what a supplier must do: Must not convey or reassign a
supplier number.
Standard number: 19;
Description of what a supplier must do: Must have a complaint
resolution protocol to address beneficiary complaints that relate to
supplier standards in paragraph (c) of this section and keep written
complaints, related correspondence and any notes of actions taken in
response to written and oral complaints. Failure to maintain such
information may be considered evidence that supplier standards have not
been met. (This information must be kept at its physical facility and
made available to CMS, upon request.)
Standard number: 20;
Description of what a supplier must do: Must maintain the following
information on all written and oral beneficiary complaints, including
telephone complaints, it receives:
(i) The name, address, telephone number, and health insurance claim
number of the beneficiary;
(ii) A summary of the complaint;
the date it was received;
the name of the person receiving the complaint, and a summary of
actions taken to resolve the complaint;
(iii) If an investigation was not conducted, the name of the person
making the decision and the reason for the decision.
Standard number: 21;
Description of what a supplier must do: Provides to CMS, upon request,
any information required by the Medicare statute and implementing
regulations.
Standard number: 22;
Description of what a supplier must do: All suppliers of DMEPOS and
other items and services must be accredited by a CMS-approved
accreditation organization in order to receive and retain a supplier
billing number. The accreditation must indicate the specific products
and services, for which the supplier is accredited, in order for the
supplier to receive payment for those specific products and services.
Standard number: 23;
Description of what a supplier must do: All DMEPOS suppliers must
notify their accreditation organization when a new DMEPOS location is
opened. The accreditation organization may accredit the new supplier
location for three months after it is operational without requiring a
new site visit.
Standard number: 24;
Description of what a supplier must do: All DMEPOS supplier locations,
whether owned or subcontracted, must meet the DMEPOS quality standards
and be separately accredited in order to bill Medicare. An accredited
supplier may be denied enrollment or their enrollment may be revoked,
if CMS determines that they are not in compliance with the DMEPOS
quality standards.
Standard number: 25;
Description of what a supplier must do: All DMEPOS suppliers must
disclose upon enrollment all products and services, including the
addition of new product lines for which they are seeking accreditation.
If a new product line is added after enrollment, the DMEPOS supplier
will be responsible for notifying the accrediting body of the new
product so that the DMEPOS supplier can be re-surveyed and accredited
for these new products.
[End of table]
Source: 42 C.F.R. § 424.57(c).
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Gregory D. Kutz, (202) 512-6722 or kutzg@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Matthew Harris, Assistant
Director; Erika Axelson; Gary Bianchi; Valerie Blyther; Norman Burrell;
Ray Bush; Shafee Carnegie; Jennifer Costello; Paul Desaulniers; Dennis
Fauber; Craig Fischer; Janice Friedeborn; Jessica Gray; Ken Hill;
Christine Hodakievic; Jason Kelly; Barbara Lewis; Christopher Madar;
Jeffrey McDermott; Andrew McIntosh; Keith Steck; and Viny Talwar made
key contributions to this report.
[End of section]
Footnotes:
[1] See appendix I for a complete list of the standards. Three of the
25 standards were created by a 1994 statute (42 U.S.C. §
1395m(j)(1)(B)(ii)), and HHS added 4 standards related to accreditation
in 2006 that were mandated by Public Law 108-173. The other 18
standards were established by regulation. The 25 standards are found at
42 C.F.R. § 424.57(c).
[2] DMEPOS suppliers can choose to contract with third party billing
agents who do not have to complete the test billing process because
these agents have their own billing software.
[3] GAO, Medicare: More Effective Screening and Stronger Enrollment
Standards Needed for Medical Equipment Suppliers, GAO-05-656
(Washington, D.C.: Sept. 22, 2005).
[4] Among other things, CMS agreed to require NSC to check suppliers'
licenses and liability insurance each year, require NSC to conduct out-
of-cycle inspections, and require the inspection of beneficiary files.
[5] The quality standards are available at [hyperlink,
http://www.cms.hhs.gov/MedicareProviderSupEnroll/].
[6] First-time applicants for enrollment can be denied, while DMEPOS
suppliers currently enrolled in the program that are renewing their
applications for billing privileges may have their current billing
numbers revoked. DMEPOS suppliers must renew their Medicare enrollment
application every 3 years.
[7] 73 Fed. Reg. 4503 (Jan. 25, 2008).
[8] An EIN is issued to any person or company who must pay withholding
taxes on employees, while an NPI is a unique identification number for
covered health care providers and is required to enroll in Medicare.
[9] The Medicare enrollment application was straightforward and easy to
complete. In addition to supplying our business names, locations,
mailing addresses, and phone numbers, we also had to state what type of
supplier we were applying to be (e.g., an ambulatory surgical center; a
nursing care facility; an oxygen supplier; or a medical supply company)
and what type of products we were going to supply. We were also asked
to provide information regarding any previous legal actions taken
against our companies and their owners. Finally, we had to certify that
we had made no false statements on the applications and that we would
not knowingly present a fraudulent claim for payment. We were also
asked to submit copies of all federal and state licenses, our liability
insurance, and forms authorizing electronic funds transfer.
[10] Prior to this date, on November 1, 2007, we closed down our
physical office and switched to a "virtual office" in the same
building.
[11] As specified by the billing software, we first created a series of
"reference files" containing all this information to facilitate
processing.
[12] When our claims were rejected, we received an error message which
stated "NPI Not on Crosswalk." The help desk told us that we had to
include our Virginia Medicare billing number in our NPI file on the
National Plan and Provider Enumeration System Web site (NPPES) for our
claims to be accepted.
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